Emerging economies spur global recovery: IMF

WASHINGTON - The global economic recovery is advancing with strong growth in key emerging economies - China, India, Indonesia and Turkey - and growing intra-regional trade, particularly in Asia, offsetting weaker demand from advanced economies, according to the International Monetary Fund (IMF).

The pace of recovery is, however, uneven, the IMF said in a report on Global Economic Prospects and Policy Challenges prepared for the just concluded meetings of G-20 Finance Ministers and Central Bank Governors in Paris.

Growth in G-20 emerging economies remains robust, but signs of overheating are emerging in some economies, it said. Robust domestic demand and the recovery of global production continue to power the expansion in emerging economies, it said.

Among G-20 emerging economies, with some exceptions like Mexico and South Africa, unemployment has been trending downward as the expansions have gathered momentum. Output gaps have been closing rapidly, and some countries have begun to experience excess demand.

This, combined with rising food and commodity prices, and in some cases strong capital flows, is fuelling inflationary pressures in many emerging economies, including Brazil, China, India, Indonesia, and Russia, IMF said.

Global GDP increased at a stronger-than-expected annualised rate of over 3.5 percent in 2010 third quarter, it said.

In G-20 advanced economies, activity has moderated less than expected, but growth remains subdued and insufficient to significantly reduce still-high unemployment.

Cooperative and well-timed policy initiatives across the G-20 are critical to sustain the global recovery, while reducing global imbalances, it said.

In G-20 advanced economies, the most urgent requirements are for comprehensive and rapid actions to overcome sovereign and financial stresses in the euro area and accelerate progress in developing medium-term fiscal consolidation plans.

In G-20 emerging economies, the key policy challenge is to keep overheating pressures in check and respond appropriately to capital inflows.

In key surplus economies, overheating pressures can be alleviated by permitting currency appreciation, facilitating a healthy rebalancing from external to internal demand, IMF said.

If countries do not use existing policy levers, large capital flows may contribute to risks of overheating, a deterioration of current account deficits beyond what is already assumed in the baseline in some countries (eg. Brazil, India, South Africa, and Turkey), and asset price bubbles that could undermine economic prospects, it said.

The macroeconomic policy stance in major emerging economies will need to increasingly reflect rising inflation and overheating pressures, IMF said. For instance, greater emphasis may need to be placed on monetary as well as fiscal tightening in India.

(Arun Kumar can be contacted at arun.kumar@ians.in)